A high-tech crystal ball: How the new betting exchanges can help predict the future

The paper entitled “Market Efficiency in Person-to-Person Betting Markets”, describes how recent predictions obtained from the analysis of betting trends on Betfair and Tradesports have included accurate forecasts for the winner of every US state in last November’s Presidential election and even a correct prediction for the date of capture of former Iraqi president, Saddam Hussein.

This study analyzed also a huge data set of UK horse races, producing forecasts of the outcome of these races that are “informationally efficient,” meaning that they reflect all available information to the best advantage.

According to the researchers these results have much wider implications than predicting the winners of horse races. This is the path to predicting the outcomes of any number of future events, ranging from elections to verdicts in criminal trials to the outbreak of war.

The volume of person-to-person wagers on the betting exchanges has grown rapidly since their introduction in 2000. Betfair, the market leader, currently matches about 500,000 bets per day.

The advantage of this form of betting for predicting the future is that the exchanges allow everyone in the world to potentially bet for or against an event happening, creating a genuine market in information.

The researchers argue that the lower margins facing clients of betting exchanges, compared with traditional bookmakers, are responsible for an improved flow of information and more efficient processing of that information.

For this reason, they conclude, the odds quoted in these markets are particularly accurate, and free of the biases found in traditional betting markets.

Professor Leighton Vaughan Williams, Director of the Betting Research Unit at the Nottingham Business School, Nottingham Trent University, says: “Our findings offer a route to a golden age in which we will be able to make the dream of a high-tech crystal ball a genuine reality.”

“It really is a case of following the money, because those who know the most are likely to bet the most, and this allows us to construct a window into our future,” he added.